So every time you make an investment, you punch your card once. It’s difficult to really get 20 wonderful decision in an investment lifetime. But it is possible to get a couple, or even a few. And these few wonderful ideas would make you a very wealthy person.
Buffett did not get rich by jumping ship whenever Wall Street paints a different picture. He got rich mainly because he is 1) objective; 2) focused (both in thoughts and betting when the odds is right); 3) waiting for the fat pitch and betting big when it comes. He is smart for sure but that has probably less to do with his investment success than being objective and logical. There’re many people who are as smart as him in terms of I.Q. But in investing, the most important quality, according to Buffett, is not how much IQ you’ve got, but rather temperament. You can have an IQ of 150 but you can be pauper if you lack the emotion needed in investing (Long Term Capital Management is one prime example). A reasonable amount of intelligence is required but temperament is 90% of it.
So when you restrict yourself to 20 opportunities in investing, it is essentially telling yourself you must not diversify. In Buffett’s words, DIVERSIFICATION is only for people who do not know what they are doing. Well, although I have to admit diversification is on the whole good for people who do not have the prerequisites to proper sustainable investing, then putting money in a diversified mutual funds or ETF is the best investing method. One thing to note for investors who invest in funds that track the market, they cannot and must not expect their returns to be better than what the index or market can perform on the average, or even on a yearly basis for any of the year that they have their money in the fund. Why? Any funds that track the market will always tag along to the market performance, and in any case, investors have to pay haircuts or commissions to the intermediaries. So the return must logically be less than the market performance. But what an investor can do to ensure that his long term result is better than most other investors who similarly have invested in a fund that tracks the market is to find the fund that has the least cost and low turnover rate because cost is the component that caused the fund performance to be below that of the market index.
If you chose to be one who wants to have the fun and experience to be a true investor, then the idea of restricting oneself to 20 opportunities is a big idea. But the important thing here is to be able to recognize those 20 ideas when you see them, and that you do something about them. There’re only few questions an investor should ask themself in order to identify such Twenties. First question is “how long does it takes the management to have to think before they decide to raise prices?” The ability to raise prices coupled with the ability to differentiate yourself in a real way means you can charge a different price and that makes it one-half towards being a great business. Then the next question to ask is “will the business still be around five or 10 years from now?” And if they do, “will their customers be able to get their fixes, services or products from some other different sources?” Essentially, these are questions an investor must ask before investing and the key is to identify firstly, great businesses and then secondly, to purchase a meaningful amount at a fair price, or even better unvalued price. These questions are simple enough but it is actually more in depth which I shall write a little more in my next article.
Charlie Munger, in his speech at USC in 1994 on a Lesson on Elementary, Worldly Wisdom as it relates to Investment Management and Business, said that you wait until you find a mispriced opportunity. The wise ones bet – read invest – only when they get that great opportunity – read fat pitch in Buffett’s words. They bet big when they have that opportunity. The rest of the time they don’t, it’s that simple. Ironically, most people, they find themselves smarter when they try to do more and to have more tries. Later in the same speech he says that “most of Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s a very brilliant man. Warren’s a lot more able than I am and very disciplined…devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying that most of the money came from ten insights.” Right now Berkshire’s top 6 marketable stocks account for 70% of their stock’s portfolio.
Mohnish Pabrai manages Pabrai Investment Funds and, since 1999, has delivered annualized returns of over 28% (net to investors). With a track record like that, he’s worth listening to (at least somewhat because it takes a much longer time in order to be recognized as a great investor). As of March 31, 2007, Pabrai registered 13 holdings in his portfolio. A steel producer, IPSCO, comprises over 18% of his portfolio. In his book, “Few bets, big bets, and infrequent bets,” is the title to Chapter 10.
Now really do we need further analysis to prove all the above? I understand there’ll always be many investors who are “impatient” and want to own “many stocks” or even “jumping from flower to flower.” It is good to have more such, in fact, I hope so because it reduces the pool of serious investors who are of a better grade. But the question to ask is which side do you like to be on. Each person needs to do what suits their personality best. I cannot guarantee you that the stock you buy at 45 times earnings have no chance of going to 70 or 80 but I can tell you the likelihood is against you. The stock that you buy at 45 times earnings that doubles in 6 months might be profitable but you are not practicing value investing. (DISCIPLINE we are talking about here.) The true value investor bets infrequently and on stocks that are “priced” appropriately. Buffett has not, never before, and apparently never will buy any stocks that are priced at 35 times earnings. Walmart, Coke, Gillette, Geico, Johnson and Johnson, Wells Fargo or any of his other holdings that got him the bulk of his wealth were not bought at PE that were 35 or even 25 for the matter. They were purchased when they were “teenagers” (PE in their teens). Pabrai in an interview in early 2007 says that the number one trait a successful investor needs is patience. He even admitted that he is a shameless cloner of Buffett.
One thing to add besides what have been communicated by my heroes, or even Pabrai is the fact that in life, not everyone will feel they’re as much rewarded financially than they’re intellectually. But personally, I think intellectual reward is much gratifying than financial rewards. In most cases, intellectual rewards will lead to financial rewards but not necessarily on the same scale that you feel or expect it to be. Having said that, a person only can have about 3 meals and 24 hours a day, so why the heck does one really need to be rewarded financially way beyond what they really need? Having 2X financially may initially make you jump for joy but not necessarily when you have 3X against 2X. Personally, I think it will be more rewarding and satisfying if the multiple of X, in terms of intellect, increases.
Want to make 28% compounded annually? Well, just be a shameless cloner. We don’t need to be an original thinker or inventor like Einstein or Mozart to be successful. Even Mozart led a miserable life because he overspent his income that is a nuttiness that sometimes accompanies even a smart guy like Mozart. And we can definitely see there’re many smart talented people in the investment community with a streak of nuttiness. After all that have been said, it seems investing is a simple game, although not easy by any means, but by no means is investing a difficult task. Essentially, if you can answer the few answers that are important – most are not – and applying those by finding the few ideas that cause extraordinary results and finally, have the wisdom and discipline to sit on your bum, you’re well on the way to a decent result, although it seems to be a boring one.